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TMI Blog2018 (8) TMI 1182X X X X Extracts X X X X X X X X Extracts X X X X ..... ared gross total income of Rs. 14,22,58,195/- and the same has been claimed as exempt u/s 80IE and total income has been declared at Nil. 3. During the course of assessment proceedings, the Assessing Officer observed that the assessee has shown income under the head "Other sources" amounting to Rs. 4,47,166 which consists of interest on income tax refund amounting to Rs. 3,53,135/- and miscellaneous receipts of Rs. 94,031/-. As per Assessing Officer, in order to claim deduction u/s 80IE, the profits should have been derived by the undertaking from manufacture or production of eligible article or thing. It has been held by the Assessing Officer that there must be direct nexus between profit and manufacturing activity of the industrial undertaking. The income from other sources may constitute profit of business u/s 28 but it cannot be construed as profits derived by the industrial undertaking. Accordingly, the AO held that the assessee is not eligible to claim deduction u/s 80IE in respect of income from other sources amounting to Rs. 4,47,165/-. 4. Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A) who following the decision of the Co-ordinate Benches ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if the business funds are invested in TDS, then it is in the nature of business income. 7. In support reliance, the ld AR placed on the decision of Hon'ble Karnataka High Court in case of Hubli Electricity Supply Co. vs. DCIT (2018) 404 ITR 462 (Kar) wherein it was held that interest income on fixed deposits was eligible for deduction u/s 80IA of the Act. It was accordingly submitted that the assessee earned interest on the TDS amount which otherwise would have been available to the assessee and which would have yielded business income. Therefore, interest refund is received in view of the business income and it is eligible for deduction u/s 80IE of the Act. 8. The ld DR is heard who has relied on the order of the lower authorities. It was further submitted by the ld. DR that the decision of the Hon'ble Karnataka High Court is distinguishable on facts and not applicable in the instant case. 9. We have heard the rival contentions and purused the material available on record. The limited issue under consideration relates to whether interest on income tax refund is eligible for deduction under section 80IE of the Act. The contention of the assessee is that it has only one business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that any income derived by the undertaking from the business of power generation is eligible for the deduction and the interest income falls under this category. It is also pointed out that the income-tax is paid by the undertaking and not the assessee. In contrast, the argument of the revenue is that the interest received by the assessee is on account of fixed deposits with bank and income-tax refund and these two items of income have nothing to do with the business of the undertaking, which is that of power generation and, therefore, the interest cannot be considered as profits derived by the undertaking from the eligible business. Both sides have drawn our attention to certain authorities which we shall refer at the appropriate stage. 10. It is necessary to notice that the interest income of Rs. 9,82,050 consists of the following : (a) Interest from fixed deposits from banks 6,00,547 (b) Interest on Income-tax refund 3,81,501 The case of the assessee is that the entire interest qualifies for the deduction. However, it was agreed by all concerned that even if one of the two items of the interest income is held not eligible for the deduction then it would fall to be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome derived by the said undertaking from the business of power generation. For this purpose, which is the relevant enquiry to be carried out under section 80-IA(1), it is not necessary to examine whether the difference in the phraseology between the aforesaid sub- section and sections 80HH(1) and 80HHA(1) would make any difference to the principle. Even in a case where the assessee contends that the interest on the income-tax refund is eligible for deduction under section 80HH or 80HHA, it would be relevant to examine whether the said interest can be considered as part of the profits and gains derived from an industrial undertaking or a small scale industrial undertaking. In all the three cases, it would be a necessary enquiry to find out if such interest can be considered as part of the profits and gains of the eligible business. Even if we are wrong in this view the position that would still remain is that it is necessary for us, while dealing with the case of deduction under section 80-IA, to examine whether the interest on the income-tax refund can be considered as income derived by the undertaking from the eligible business (i.e., power generation). 12. We may first proceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al principles and in accordance with the practice which prevails in England, it is well-settled that income-tax paid by an assessee cannot be allowed to be deducted out of the assessable income. The reason for this practice is that income-tax is a share of the Crown in the income of the assessee and cannot be treated as an expenditure necessary to earn that income." In Smt. Padmavathi Jaikrishna v. Addl. CIT [1987] 166 ITR 1761 , the Supreme Court observed as under at page 179 : "We are inclined to agree with the High Court that so far as meeting the liability of income-tax and wealth-tax is concerned, it was indeed a personal one and payment thereof cannot at all be said to be expenditure laid out or expended wholly and exclusively for the purpose of earning income." These observations were made with reference to section 57(iii) of the Act but it makes no difference to our view because the ratio of the judgment is that income-tax payment is a personal obligation. The following general principles emerge out of the above authorities : (a)that income-tax is an appropriation of the profits and is paid out after the profits are earned; (b)that it is the State's share of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for decision which was only whether the interest was capital receipt. It was further submitted that though at page 321, the Madras High Court held that the interest may not be 'an income arising from an activity', business or investment, it would come under the head "Other sources", these observations have to be understood only in the context of the precise controversy which was before the Court. While it may be true that the judgment of the Madras High Court (supra) did not deal with the precise controversy that has arisen for decision before us and the observations made therein have to be understood only to the extent that the interest received on income-tax refund would fall to be considered under the head "Income from other sources" and where a contention is advanced that such interest having arisen because of deployment of the business funds in the payment of tax, the same is assessable under the head "Profits and gains of the business", the judgment cannot be relied on to reject the contention, the other authorities to which we have alluded have clearly held that payment of income-tax is a personal obligation and cannot be deducted in the computation of the business profits. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would have been open to recovery action by the income-tax authorities. The Supreme Court rejected the plea based on section 37 on the ground that the interest payment was not in any way connected to the assessee's business or incurred wholly and exclusively for the purpose of the business. It was observed that the tax is payable on the assessee's income after the income is determined and, therefore, the interest cannot be considered as expenditure for the purpose of earning the profits. This judgment also shows that payment of tax or interest on monies borrowed for payment of tax has not been viewed as something connected to the business operations of the assessee and the Courts have been inclined to take the view that payment of tax is a personal obligation not connected with the business. The deployment of funds of the business of power generation in making tax payments cannot, therefore, be consi-dered as something connected to the assessee's business so that it can be successfully contended that the interest on excess payment of tax will partake the character of business income. 15. For the aforesaid reasons, we are unable to accept the contention of the assessee that the in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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